Tuesday, July 29, 2008

Cassava for biofuel--no free lunch

The biofuels industry is on a quixotic quest for a free lunch--to find raw materials that don't cost anything--switchgrass, jatropha, used vegetable oil, wind, etc. Most of these are years or decades away from practical use. But let’s consider cassava, also known as tapioca, a “nongrain” feedstock that has already been brought into production.

In December 2007 China opened its first biofuel factory that uses a nongrain feedstock—cassava, also known as tapioca. Cassava is basically a weed that will grow anywhere. You just stick a piece of it in the ground and come back 8 months later to pull up its starchy root. It grows mostly in GuangxiProvince and other parts of Southeast Asia where there is lots of rain, sunshine, and marginal soils. The idea is that biofuel can be produced from cassava without diverting grain away from food or feed users—that is, basically a “free” good.

(If you skipped the first chapter of your economics textbook, the basic fact of scarcity is that you can’t get more of one good without sacrificing something else. It turns out that the law of scarcity applies here too.)

It turns out that cassava has become a fairly significant source of starch that substitutes for corn in China. When I looked into China’s customs statistics last week I discovered that China has been importing increasing amounts of cassava—up to nearly 5 million metric tons in 2007. That’s about the amount of corn that some past projections predicted China would be importing by now. (Interestingly--coincidentally or not?--it is also about equal to the amount of corn China exported in 2007.)

China’s starch industry has been that fastest-growing use of corn. It uses corn and other starchy substances to produce hundreds of different products like sweeteners, msg, pharmaceuticals, glues, textiles, etc.

One of the stories we’ve been hearing from China is that corn markets have been getting tighter—that increasing industrial use of corn from factories built in the corn-surplus northeastern provinces was reducing the amount available to the industrial starch behemoths in ShandongProvince. It turns out that most of the cassava imports go to these big starch-producing regions—the Qingdao (Shandong) and Nanjing (Jiangsu) districts. It looks like the starch producers have coped with tighter corn markets by importing cheaper cassava from Thailand and Vietnam. Thus, China has averted corn imports at least in part by importing cassava instead. Analysts have been predicting for years that China will become a corn importer, but they never do. No one ever considered that cassava could be a cheaper source of starch that China could use to meet its growing demand for starchy substances.

We have here a rightward-shift in demand for cassava. A new biofuel plant in Guangxi, factories using more imported cassava in northern China. Southeast Asian countries are on the biofuel bandwagon too, encouraging their own producers to make biofuel from cassava. The result of increased competition is climbing cassava prices. There is no free lunch, even in biofuels.

China’s imports of cassava have plunged in 2008, which is probably due to the surge in prices. Guangxi’s crop was hurt by low winter temperatures. Someone is not getting as much cassava as in previous years. I suspect the hundreds of small starch factories and livestock producers in Guangxi and other parts of southeast Asia that have used cassava as their raw material for generations are now suddenly finding themselves priced out of the market. Cassava is not a free good. Using more of it to produce biofuels will divert it from other uses, forcing up prices, and straining supplies of substitutes—like corn.

Another news report last week said there are plans to build a cassava-based biofuel in Hainan Island which would use cassava produced on land acquired by the biofuel company in Laos, an example of the controversial policy of acquiring land in developing countries to produce China's food (and fuel?) needs. Watch out world, here comes China!